The Coming Indian Summer?
China is grabbing the headlines, but should we perhaps be looking at India instead ?
Edward Hugh - Copenhagen: June 2011
• Unlike China and many Asian growth economies India is largely driven by
domestic consumption, not by exports and capital investment. Given its large
rural population India’s consumption basket has traditionally had a heavy bias
towards food and other essentials, but the share has been declining over time.
Since 2000 the share of food in total consumption has steadily declined while
services, transport and communications have all increased.
In this presentation I will argue that
• In terms of growth rates and global GDP shares India has been overshadowed
by the rise of China. Yet, in the longer run, at least in terms of the demography,
the future belongs to India. During the coming decade India will steadily convert
itself into one of the key engines of global growth.
• In demographic terms, India is undoubtedly the coming global
powerhouse. The overall number of both young and prime age workers is
growing rapidly and will exceed those in China over the 2025/35 horizon. And
India’s demographic dividend will be operative over a very long period, even as
China’s working population ages and declines.
In Growth Economics, Size Doesn’t Matter?
For 25 years our institutions have mis-analyzed such world development problems as
starving children, illiteracy, pollution, supplies of natural resources and slow growth. The
World Bank, the State Department's Aid to International Development (AID), The United
Nations Fund for Population Activities (UNFPA) and the environmental organizations have
asserted that the cause is population growth - the population "explosion" or "bomb" or
Julian L. Simon, 1985: “WHY DO WE STILL BELIEVE that population growth slows
economic development? “
The Great False Trail
In 1967 Nobel laureate economist Simon Kuznets , at the behest of the United
Nations, carried out a study of population growth and economic growth using a
data set covering a wide variety of countries since World War II.
The basic methodology, having assembled the data on rates of population
growth and rates of economic growth, was to examine whether - looking at all
the data in the sample together - those countries with high population growth
rates have economic growth rates lower than average, and countries with low
population growth rates have economic growth rates higher than average.
The study was unable to find any statistically significant evidence that faster
population growth is associated with slower economic growth. Taken on average,
countries whose populations grew faster did not grow slower economically.
Hence was born the idea that population dynamics were not central to economic
Finally, The Truth Revealed, It Is Population Structure That Matters
Turkey 1995 Japan 1990 Japan 2030
Adolescent Middle Aged Elderly
The demographic dividend refers to the rise in the economic growth rate which
occurs due to a rising share of working age people in a given population. The
phenomenon is usually observed towards the end of the first phase of the
demographic transition when the fertility rate has fallen far enough and long
enough for the youth dependency rate to decline. During this demographic
window of opportunity, output per capita rises since simple arithmetic tells us the
population is more productive (as a whole).
So It’s Structure Not Size, You Silly Billy!
Right For The Wrong Reasons? The Idea Of BRICS Is JustToo Simplistic
Definitely The Short Term Is All About China
On the global stage, India is still overshadowed by the impressive rise of
China since 1997. According to figures from the IMF the share of global
output for China, India and Brazil respectively are forecast to be 12.2, 2.9 and
3.4 percent in 2015.
But China Is Getting Old Too Fast
By 2040, assuming current demographic trends continue, there will be 397
million Chinese over 65 - more than the total current population of France,
Germany, Italy, Japan, and the United Kingdom combined.
Median Population Age –
A Simple Rule-of-Thumb Measure Of Ageing
Key Point: While population ageing is universal the short term impact will be
much more localised. We may be all headed to the same destination but the
trains in which we are travelling are moving a different speeds.The pace of
ageing varies greatly across countries and regions.
China is an ageing outlier in Emerging Market Terms.
China Will Be One Of The Most Rapidly Ageing
Countries in the 2020s
The ageing problem goes well beyond the confines of the EU or the G7. In
particular China stands out among developing economies, since the degree
of ageing we should anticipate, when viewed in terms of absolute numbers
and velocity, is simply staggering.
It is during the 2020’s that
China’s age wave will arrive in
full force. The elder share of
China’s population seems set to
rise steadily from 11 percent in
2004 to 15 percent in 2015, and
then leap to 24 percent in 2030
and 28 percent in 2040. Over
the same period, China’s
median age will climb from 32
So In China Both Working Age And Total Population
Will Soon Be Declining and Ageing
China’s ageing is characterised by the unusual speed with which it is occurring. In
Europe, the population over 65 passed the 10 percent threshold back in the 1930s
and is not expected to reach the 30 percent mark until the 2030s, exactly one
century later. China, on the other hand, will traverse this same distance in a single
generation. The magnitude of China’s coming age wave, is simply staggering.
India Has A Much Stronger Demographic Profile Than China
In India the whole demographic transition is much more balanced. While the proportion
of population in the under 14 age group declined from 41 per cent in 1961 to 35.3 per
cent in 2001 (that is, by 5.7 percentage points), the proportion of population in the age
group 15-59 increased from 53.3 per cent to 56.9 per cent (that is, by 3.6 percentage
points). The proportion of those over 60 increased from 5.6 per cent to 7.4 per cent
(that is, by 1.8 percentage points).
The increase in the 15-34 age-group population has been quite dramatic:
from 174.26 million (31.79 per cent) in 1970 to 354.15 million (34.43 per
cent) in 2000. The youth segment of the population is projected to peak
at 484.86 million in 2030.
India’s Fountain Of Youth
According to UN Population Division projections the youth segment (15-34 years) of
the Indian population starts to decline in absolute terms after 2030, it started to fall as
a proportion to the total population in 2010. But proportionately the rate of decline is
marginal (from 35.4 per cent in 2010 to 34.5 per cent in 2020, to 32.4 per cent in
2030). However after 2030 the rate of decline will accelerate (to 29.7 per cent in 2040,
to 26.6 per cent in 2050). But even given this there will still be a massive 441.1 million
people in the group in 2050.
But No One Is
This demographic evolution will have important implications for the labour
market. India's labour force, which was estimated at 472 million in 2006, is
expected to be around 526 million in 2011 and grow to 653 million by 2031.
The labour force growth rate will be higher than the rate of increase in total
population until 2021. According to Indian government estimates, 300 million
young people will enter the labour force between now and 2025, by which time
approximately 25 per cent of the global labour force will be Indian.
In The Moden World Ageing Is A constant
Population ageing is a global phenomenon, driven by movements
in fertility rates and life expectancy. Ageing essentially comes in
two waves, which could loosely be called the first and second
During the first transition fertility falls from very high levels to
replacement levels, the proportion of those in the working age
groups rises constantly, while life expectancy increases such that
the population in the 65 to 80 age group steadily increases.
During the second transition, fertility in many countries falls well
below replacement level and stays there for several decades. Life
expectancy rises such that the over 80 population becomes a
significant part of the total population and the working age
population goes into permanent decline in both absolute terms
and as a proportion of the total.
As far as we are able to understand the mechanisms involved at this
point, population dynamics have major economic impacts and these
can be categorised under four main headings:
i) demographic processes affect the size of the working age population, and
through this channel the level of trend economic growth – for better or worse
- in one country after another
ii) through “life cycle effects” demographic processes affect patterns of
national saving and borrowing, and with these the directions and magnitudes
of global capital flows
iii) through the saving and borrowing path demographic processes can
influence values of key assets like housing and equities
iv) through changes in the elderly dependency ratio, demography influences
pressure on the sustainability levels of sovereign debt, producing significant
changes in ranking as between developed and emerging economies.
Economic Impacts Of Demography
Youth – And Economic Growth – Do Not Spring Eternal!
Still, Is India Now Headed For Double Digit Growth?
The Importance Of The Prime Age Groups
Estimates of the exact age
extension of the different groups
vary, but 25-40 would be a good
rule of thumb measure of the
borrowing range, 40 to 55 for the
peak savers, and 35 to 50 for the
prime age workers.
Beyond this, the question is an
empirical one of measuring and
testing to determine more precise
boundaries and frontiers.
The key groups are prime savers,
prime borrowers, and prime
productive workers. Where these
actual age brackets lie, and the
extent to which they may overlap,
is still a subject of some
One of the key points to grasp, is
that the proportion the
population which is to be found
in one of the ‘prime’ age groups
at a given moment in time, is
absolutely critical, and much
more important for
understanding the processes at
work than the mere size of the
working age population.
In an ongoing process of trial and error calibration, Claus Vistesen
and I have recently been working with the age groups 35-54 and 25-
39 as proxies for the prime age (peak growth) and prime borrowing
age groups, respectively. On these measures, India comes out among
the economies with largest combined increase between now and
India’s Win-Win Profile
Yet One More Time India And China’s Paths Cross
Credit driven expansions in China will soon get harder and harder to come
by, while in India the key group doesn’t peak until the mid 2030’s (should we
be worried about a housing bubble??) and even then only tapers off slowly.
As A Result Consumption In India Is Strong
And Fixed Capital Investment Doesn’t Reach Chinese Proportions
India’s Exports Are Growing Fast
But So Are It’s Imports – It Runs A
Trade Deficit (well, someone has
India's merchandise exports rose sharply in
May, helped by a surge in shipments of
engineering and electronic products, giving
the government a good start towards
achieving its export aim for this fiscal year.
India's exports in May jumped 56.9% year-
on-year to $25.9 billion and totalled $49.8
billion for the first two months of the fiscal
year that started on April 1, up 45.3%,
Commerce Secretary Rahul Khullar said at a
press conference Friday.
However, May imports surged 54.1%
to $40.9 billion, touching the highest
level in four years and raising worries
of a widening trade deficit. The trade
deficit was at $15 billion in May - the
widest since August 2008
As we have seen, the demographic dividend refers to the period in the
demographic transition in which the working age share of the
population increases. In India’s case, this period is going to last all the
way up to 2040. This is shown then in the fact that the peak growth
age group (35-54) will continue growing all the way through to 2040.
Generally, the conclusion on India’s demographics based on current projections
is that the demographic dividend is set to be stretched over a long period.
Yet We Should Always Remember - Nothing Is Automatic
Despite the widespread perception of India as a country of thriving
entrepreneurs, the cost of starting a business is in fact vastly greater
than it is in many other key global economies, even those on a
comparable income level.
India’s current inflation problem is largely a structural one, in large
part due to supply side rigidities and low capacity slack in key sectors.
This evidently increases the risks that headline inflation will feed into
core prices, since unlike in many developed economies, India’s
inflation is, in part, a demand driven phenomenon.
Of the main components of the wholesale price index, only food
manufacturers have seen an unprecedented in inflation since 2008 while
increases in industrial and manufacturing input prices have been large but
far more modest.
On The Other Hand The Central Bank Does Respond
Governor Duvvuri Subbarao said on May 3 inflation
will stay at an “elevated level” until September as he
raised the central bank’s repurchase rate by half a
percentage point to 7.25 percent. Monetary tightening
in India will slow growth this year and help ease
inflation to 6 percent “with an upward bias” by March
31, 2012, Subbarao said. India’s economy may expand
“around 8 percent” in the year through March from
8.6 percent in the previous 12 months, he estimated.
And is willing to sacrifice growth
for inflation discipline. Since part
of the issue is strong internal
demand growth Subbarao has
some chance of success.
At The Same Time Governance In India Is A Concern
While private sector indebtedness is low in India,
government debt is high, and very high by emerging
This year’s budget-
deficit target (the
deficit is around 10%
of GDP) is “difficult to
of the Prime Minister’s
Council, told reporters
in Mumbai on June 2.
As A Result India Has Trouble In The Current Account Department
India reported a current account deficit equivalent to 9.7 Billion USD in the
fourth quarter of 2010. India is leading exporter of gems and jewelry, textiles,
engineering goods, chemicals, leather manufactures and services. India is poor
in oil resources and is currently heavily dependent on coal and foreign oil
imports for its energy needs. Other imported products are: machinery, gems,
fertilizers and chemicals. Main trading partners are European Union.
Of Course, Part Of The Problem Is Caused By The Usual Culprit
QE2 – aka A Surge In Capital Inflows
Net private capital inflows to
emerging market economies
will keep growing this year
and next to reach $1.1 trillion
in 2012, attracted by
economic growth above 6
percent in those countries, a
banking industry group said.
Institute of International
Finance today also raised its
estimates for 2011 inflows by
$81 billion to $1 trillion to
reflect higher forecasts for
Brazil and China.
“The strength of capital flows is still
presenting policy challenges in a number of
emerging economies, especially those already
facing pressures from rising inflation, strong
credit and asset price growth and rising
exchange rates,” the IIF wrote in its research
We Should Never Forget India Is Still An Emerging Economy
• Despite many difficulties India has remained a democracy since independence
• Human rights are by and large respected
• Institutional quality is improving
• The central bank is becoming more and more independent
• Corruption is still a BIG problem, but this has solutions
• India is a country of individuals, of creativity and strong entrepreneurial spririt
• Lastly, a professional bias: India produces economists of extraordinary quality
But It Sure As Hell Is A Large and Significant Part Of The Picture
“If you look at the world, it would inevitably appear India’s growth is preordained. The
world needs working hands. The world needs back offices. India seems to be a natural
fit…We are producing a workforce which is not only for India, but a global workforce.”
Sunil Bharti Mittal, founder and chairman of New Delhi-based Bharti Enterprises
Thank You For Your Attention
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